Reference no: EM13683977

A Contrasting ABC and Conventional Product Costs (LO2, LO3, LO4)

Marine Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company's profits have steadily declined. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the rigid model. The flexible model requires 2.0 hours of direct labor time per unit, and the rigid model requires 1.0 hours. Direct materials and labor costs per unit are given below:

Deluxe Regular                            Flexible    Rigid

Direct materials cost per unit      $110        $80

Direct labor cost per unit             $30          $15

Requirement 1:

(a) Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

(b) Compute the unit product cost for one unit of each model. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Requirement 2:

An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:

Activity                                                                 Estimated overhead cost

Activity Cost Pool and Activity Measure                                                                              Flexible            Rigid               Total

Purchase orders (number of orders)               $20,000                                                       100                   300                 400

Rework requests (number of requests)           $10,000                                                       60                     140                 200

Product testing (number of tests)                     $210,000                                                    900                   1,200             2,100

Machine-related (machine-hours)                     $360,000                                                    1,500                2,500            4,000

                                                                          $600,000

Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Requirement 3:

Assume that actual activity is as expected for the year. Using activity-based costing, do the following:

(a) Determine the total amount of overhead that would be applied to each model for the year. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

(b) Compute the unit product cost for one unit of each model. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Requirement 4:

Can you identify a possible explanation for the companies declining profits? if so, what is it?